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Consumers' three biggest enemies

October 16, 2012: 11:41 AM ET

Despite signs the economy is improving, for many Americans, it's still one step forward, one step back.

gas-pricesFORTUNE  -- The good economic news is in: After the unemployment rate dipped below 8%, it seems consumers are feeling better about their prospects. They spent more than most economists expected in September -- retail sales rose 1.1% from the previous month, the Commerce Department reported Tuesday. Though this signals that retailers in 2012 could certainly end on a high note, it doesn't necessarily mean consumer spending (which makes up two-thirds of the U.S. economy) has turned the corner. Here are three reasons why.

Higher gas prices – The impressive retail bump might suggest consumers are feeling better about the economy. They spent more on big-ticket items, such as automobiles and iPhone 5s, but the rise was also largely driven by higher gas prices. Receipts at gas stations rose by 2.5%, reflecting higher prices paid at the pumps. Nationwide, gas prices averaged $3.79 on Tuesday, which is higher than the average $3.45 a gallon a year go. Analysts expect prices, particularly in California where costs have risen well over $4 a gallon, will start easing some after an idled refinery resumes production.

Chris Christopher, analyst with IHS Global Insight, says he expects prices to fall to an average of $3.37 a gallon by the end of the year. But even with the modest decline, that only puts costs around where they were a year ago – suggesting that prices won't come down nearly as quickly as they have risen. Even so, the fact that the nation's refineries are aging and there has not been one built since 1976 could nonetheless mean prices will be volatile.

High food prices – Unless you're a hardcore vegetarian, expect to spend more on groceries next year.

The drought gripping more than half of the country means consumers can expect to pay 3% to 4% more for their groceries next year, the U.S. Department of Agriculture has estimated. Typically grocery price inflation averages about 2.8% a year, so even a 3% jump is a higher-than-normal increase. Dry weather has pushed up prices for feed, which has translated into higher prices for hamburgers, steaks, chicken and pork chops. Beef prices, in particular, are expected to see the biggest jump at 4%to 5% next year, according to the USDA.

The spike will either lead Americans to eat less meat or spend less on all other things in the coming months.

Higher taxes – As if higher gas and food prices aren't enough to deal with, how about higher taxes? Regardless of what happens with the fiscal cliff, many Americans will see less in their paychecks starting in January when the temporary payroll tax holiday ends.

The end of the tax cut, enjoyed by 122 million wage earners, means that the typical American family (with an income of $50,054) will have about $1,000 less in additional annual income. Put another way, that's about $40 less in a biweekly paycheck -- an amount needed for small, but essential things, like filling up a gas tank for the week or paying the electric bill for the month. See how much less you'll see in your paycheck here.

Congress had renewed the tax cut in recent years, but many argued that it was costly and didn't enough to create jobs. Neither Republicans nor Democrats have shown much interest in renewing the tax cut, so expect to have less next year as you pay more for food and gas.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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